[andrew orlowski at _the register_ pointed this out to me, a speech
given by new york state attorney general spitzer -- as orlowski puts
it, a 'pugilist populist attorney straight from central casting' --
on 12 nov at an institutional investor award dinner. 'Spitzer pointed
out that the performance of Wall Street's "all-stars" he was addres-
sing compared unfavorably with that of the proverbial chimp.' see his
writeup here: <http://www.theregister.co.uk/content/7/28661.html>.
below is the text of spitzer's speech. cheers, t]
<http://www.oag.state.ny.us/press/statements/nov12_inst.html>
Ensuring The Integrity Of Electronic Commerce
Institutional Investor Dinner, November 12, 2002
Thank you for that introduction. I'm sorry that I am speaking so late
in the evening . . .
I am grateful for the opportunity to be here tonight. My continuing
dialogue with the investment community is important. It allows me to
learn what you are thinking, and provides me with the opportunity to
explain our continued efforts to reform and bring transparency to the
industry.
I also hope that my being here tonight conveys to you that although I
am a critic of certain industry practices, I am not a critic of the
analyst profession.
Tonight's program is devoted to the celebration of individual
achievement. At the same time, we must also recognize that there has
been industry-wide failure.
For at least the last several years, analysts have labored in a
corporate structure that placed undue or improper pressure on them.
Too often, they were asked to tailor their investment advice to
further investment banking interests, even if that was in conflict
with their obligation to provide honest, objective advice.
The revelations of these past few months have shown how certain
analysts succumbed to that pressure. The public's attention has been
drawn to several particularly gripping examples of the conflict -- of
analysts who privately derided as dogs -- and worse -- stocks that
they were touting to the public.
We are now also all aware that the structural problems ran much deeper
than that. Because analyst compensation was tied to the ability to
assist in or generate investment banking business, there was a strong
incentive to act as promoters of the deal and not arbiters of quality.
Some in the industry offer investor greed, wide-eyed optimism and a
herd mentality rather than misleading research to explain the losses
investors have experienced. These apologists might admit to
distortions, but never dishonesty. But to be frank about it, the
advice provided to investors was often dishonest.
It was dishonest because small investors were advised to buy stocks
that the analyst believed they never should have owned, and told to
hold stocks that they long ago should have sold.
All this has been widely disclosed and discussed this past year.
Solutions to some of these problems may be in the offing. I'd like to
spend the next few minutes discussing another area in which there is a
structural flaw which again highlights the need for inquiry, oversight
and reform.
As I noted at the outset, we are here tonight to recognize individual
achievement. It is therefore important to understand the achievement
that is being assessed and awarded.
These are the institutional investor awards, and thus reflect criteria
important to institutional investors, who prize analysts'
accessibility, their insights and their ability to uncover a valuable
piece of information about a company or sector, and their access to
management.
What these awards do not measure is the performance of analysts' buy,
sell and hold recommendations.
I am not here to question those criteria used by institutional
investors or to challenge their application. But since my focus has
been on protecting individual investors, I want to call attention to
the industry's use of these awards, which is in need of reform.
Although tonight's all-stars are named by and for institutional
investors, the brokerage houses tout these awards to the investing
public together with the analysts' stock recommendations.
The message being broadcast to individual investors by linking the
awards to stock picking is deceptively simple: follow the "smart" or
"professional" institutional money and act on these recommendations.
That message is simply deceptive.
It implies that tonight's awards measure the performance of the buy,
sell and hold recommendations offered. In fact, tonight's awards do no
such thing. Those in attendance tonight already know this. But the
investing public is not aware that the awards don't reflect the
performance of your stock recommendations.
At the request of my office, a company by the name of Investars has
analyzed the recommendations of more than four hundred past and
present institutional investor all-star analysts in 51 industries for
which there were Dow Jones equivalents.
Investars measured the performance of the recommendations made in the
twelve months prior to an analyst being named to the all-star team.
They also measured the performance of competing analysts not named to
the team. In all, 110,000 analyst recommendations were reviewed.
The results are in, and they're telling. In many instances, those
named to the all-star team are turning in lackluster performances. The
advice of analysts not chosen would very often have been more
profitable to individual investors than the advice of all-star team
members.
Let me be clear: this does not mean that the analysts honored here
tonight all performed poorly, or that they do not deserve their
awards. Some performed quite well, and based on the criteria employed
by those who voted, you are all indeed all-stars. But it does mean
that it is inappropriate for your employers to cite these awards when
touting your buy, sell and hold recommendations to individual
investors.
There is no need for me to go into great detail about the specifics of
Investars' results. Here are some of the highlights:
1. When measured by the performance of their stock recommendations,
only one of this year's 51 first team all-stars included in the
study ranked first in their sector.
2. When measured by the performance of their stock recommendations,
only one of the more than 100 members of the 2000 and 2001 first
team all-stars included in their study ranked first in their
sector.
3. When measured by the performance of their stock recommendations,
only 16 of 51 of this year's first team all-stars are in their
sector's top 5. That is an improvement over last year, when only
10 of 51 first team all-stars studied cracked the top 5. In 2000,
only 13 of 51 made the top 5.
4. More than 40% of this year's first team all-stars did not perform
as well as the average analyst for their sector. The same is true
of the 2000 and 2001 first team all-stars whose performance was
reviewed.
Investars ran several checks to ensure that their methodology was
not biased against big firm analysts.
5. In fact, their results indicate that 40% of tonight's first team
all-stars underperformed when measured against the average
performance of other big firm analysts covering their sector. 20
of the 2002 first team all-stars whose performance was reviewed
performed below their sector's average for big firm analysts; 23
of the 51 2001 first team members Investars reviewed performed
below the average of their colleagues at big firms, and 21 of 51
of the 2000 first team all-stars in the study similarly
underperformed.
6. Moreover, 25 of the 51 members of this year's first team were
outperformed by at least one of their runners-up named to the
second or third team, and half of the 2000 and 2001 first team
all-stars reviewed were bested by their runners-up.
Frankly, what is more troubling than the performance of the stock
picks of some of the all-star analysts is the lack of transparency
about that performance. When we first attempted to gather this data
ourselves, we encountered significant obstacles -- and we have certain
data gathering advantages over the individual investor.
For an industry that prides itself on trading in -- and relying upon
-- information, it was surprisingly difficult for us to gather the
data necessary to objectively measure analyst performance. The
brokerage houses make the data available on a proprietary basis to
companies that repackage and resell that data. Acquiring that data is
far beyond the means of individual investors.
Even if one can afford the data, it is sold with restrictions that
prohibit using it to make objective performance measurements available
to individual investors. Investars was only able to conduct their
study because they have painstakingly constructed a database of stock
recommendations by compiling them one-by-one from sources in the
public domain.
That has got to change. After spending hundreds of hours listening to
investment banks and their lawyers lecture about the efficiency of the
marketplace, I'm still disappointed to learn that they withhold from
the market the data necessary to allow it to perform efficiently.
The problem that I have outlined is two-fold: banks use the
institutional investor all-star designations to improperly convey to
individual investors that their analysts' stock picking has garnered
awards. Moreover, the data necessary for investors to objectively
measure an analyst's stock-picking performance is being withheld from
the market.
The solution is to require all recommendations to be provided to a
publically available database maintained by the S.E.C. or another
regulatory authority ninety days after they are issued. The banks
should also make available all the historical recommendation data
necessary to conduct performance-based measurements.
This will allow the banks to maintain their practice of providing the
recommendations to their customers on a proprietary basis while also
allowing the investing public and others to measure the historical
performance of the analysts' buy, sell and hold recommendations.
I believe that achieving this transparency should be an element of any
global resolution that is negotiated with the industry. Industry
leaders have been claiming for several months now that they favor
transparency. If they do, this is an easy first step.
Some in the audience and in the industry will undoubtedly object to
the release of this data and to the performance measurements that will
follow. You should recognize that the movement toward transparency is
not only inevitable, it is also in your interest.
More than twenty-five years ago, A.G. Becker started conducting
performance based measurements for your buy-side colleagues, ranking
their returns, and comparing those returns to the S&P 500.
The rankings have brought faith -- and extraordinary investment -- to
that industry. The weakest performers are penalized, but that is how
the market should operate. Over all, the industry has gained. Bringing
transparency to sell-side analysts will bring similar benefits to your
industry.
Another benefit of transparency will be its use as a tool to resist
investment bankers who would still want you to push the stocks they're
underwriting. Once your performance is objectively measured , you will
be more easily able to argue to your investment banking colleagues
that you must protect that performance and not sacrifice it to satisfy
banking clients.
Some analysts are undoubtedly concerned because the reforms proposed
and implemented to date may lead to decreases in their compensation.
They will question why their buy, sell and hold recommendations should
be publically evaluated if the performance of those recommendations
does not determine their compensation.
My response to them is simple: if you don't want to stand behind your
recommendations, don't make them available to retail investors. But
recognize the potential benefits of transparency: once there are
performance based measurements made publically available, there can be
no doubt that banks will compete for -- and generously compensate --
proven stock-picking talent.
I said earlier that I am a critic of certain industry-wide practices
and abuses, but not of the analyst profession. If you think that my
words here tonight sound harsh, take a moment to compare my approach
to those of some of the industry's defenders.
Alan Abelson and Michael Lewis -- two supposedly staunch advocates for
the banks and the market -- both have written that there is no need
for regulation because every investor ought to recognize that analyst
stock recommendations are useless -- and useless is their word, not
mine.
Billion-dollar mutual fund conglomerates have been built in the past
quarter-century on the theory that individuals who want to invest in
the stock market should ignore analyst recommendations and simply
purchase index funds.
While I'm not ready to dispute that advice -- which has served many
investors well -- I don't agree with Lewis and others that the product
of your labors is useless. At least it doesn't have to be. But to
restore investor confidence in the markets, in the investment banks
and in the integrity of your recommendations you need to regain the
trust of the investing public.
I am not a proponent of government intervention in markets, unless
there is strong evidence of market failure. But reform is now clearly
necessary in the brokerage industry.
The experts can debate and individual investors can decide whether
stock picking is preferable to investing in index funds. Government
should not and can not tell investors how to invest their savings.
But government can not sit idly by when banks are deceptively
marketing dishonest advice to investors -- whether by pushing stocks
that they do not genuinely believe in or by using these all-star
awards as a false proxy for stock-picking performance.
My own efforts are guided by a confidence in the positive effect that
transparency will have on the industry. The industry's efforts to
reform itself should be guided by that same confidence.
Investors may sometimes act unwisely, in haste or out of greed. But
those impulses do not excuse the industry from its obligation to
provide investors with conflict-free advice, and do not relieve the
banks of their obligation to allow investors to assess the performance
of the analysts on whom they are being asked to rely.
The investing public is understandably leery of the industry right
now. The lack of transparency and the absence of accountability to
retail investors heightened the distrust that developed when the
industry's abuses were exposed.
Because trust is so slowly accumulated, the process of restoring it is
a lengthy one.
The best way to restore that trust quickly is to adopt the proposed
reforms and to implement systems that allow for transparency. Taken
together, they can serve as a bridge over the chasm of distrust
separating the investing public from the brokerage industry.
I look forward to working together with the industry to achieve the
necessary restructuring, adopt the necessary reforms and regain the
public's trust.
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